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CONCEPT OF PROSPECTUS AND ALLOTMENT OF SHARES IN A COMPANY: LEGAL DISCOURSE WITH REFERENCE OT THE COMPANIES ACT 2013
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CONCEPT OF
PROSPECTUS AND ALLOTMENT OF SHARES IN A COMPANY: LEGAL DISCOURSE WITH REFERENCE
OT THE COMPANIES ACT 2013
AUTHORED BY - VAIBHAV KARTIKEYA AGRAWAL
ABSTRACT:
The establishment of a company necessitates huge
investment of money and resources. Prospectus is the document which records the
financial status of the company. This paper endeavours to define the term
company, provides for types of company, it defines the term 'Prospectus', the
contents of prospectus, the statements imperative for a valid prospectus and
the liability of the Directors or officers of the company for fraudulent
mis-statements in the prospectus. Further, this paper provides for the term
'share', the types of shares, the procedure for allotment o f shares in public
and private companies and the liability for any such default in the allotment
of shares. The paper stipulates the statutory provisions and the judicial
precedents on tin order to illustrate the concept of Prospectus and allotment
of shares.
INTRODUCTION:
Section
2(20) of Companies Act, 2013 defines the term “company” as: “company” means a
company incorporated under this Act or under any previous company law.
Every
Company requires huge capital to run it and therefore to fulfil its
requirements, it invites peoples (investors) to invest in their venture.
However no one wants to invest anything without consideration. Therefore the
company provides consideration by giving a part of profit to the investors.
There
are rules by which the company can appoint investors to invest, can use the
invested money and save the rights of investors. This paper provides for these
rules on investment and the rights of the shareholders.
TYPES OF COMPANY:
There
are two types of companies, namely, private and public. The definition of
private company is provided in section 2(68) and that of a public company in
Section 2(71) of the Companies Act, 2013 as under:
Section
2(68): "private company" means a company having a minimum paid-up
share capital of one-lakh rupees or higher paid-up share capital as may be
prescribed, and which by its articles,-
(i)
restricts the right to transfer its shares;
(ii)
except in case of One Person Company, limits hte
number of its members to two hundred:
Provided
that where two or more persons hold one or more shares in a company jointly,
they shall, for the purposes of this clause, be treated as a single member:-
Provided
further that--
(A) persons who
are in the employment of the company; and
(B) persons
who, having been formerly in the employment of the company, were members of the
company while in the employment and have continued to be members after the
employment ceased,
shall
not be included in the number of members; and
(iii)
prohibits any invitation to the public to subscribe
for any securities of the company.
Section
2(71): “public company” means a company which-
(a)
is not a private company;
(b)
has a minimum paid-up share-capital of five lakh
rupees or such higher paid-up capital, as may be prescribed:
Provided
that a company which is a subsidiary of a company, not being a private company,
shall be deemed to be public company for the purposes of this Act even where
such subsidiary company continues to be a private company in its articles;
WHAT IS
PROSPECTUS?
Section
2(70) of the Companies Act, 2013 defines the term Prospectus as:
"prospectus"
means any document described or issued as a prospectus and includes a red
herring prospectus referred to in section 32 or shelf prospectus referred to in
section 31 or any notice, circular, advertisement or other document inviting
offers from the public for the subscription or purchase of any securities of a
body corporate.
SALIENT
FEATURES OF A PROSPECTUS:
A
prospectus is issued to enable the investor to know the soundness of the
company’s venture. Explanation to Section 26(13) of the Companies Act 2013
provides that: The date indicated in the prospectus shall be deemed to be the
date of tits publication. Section 26(4) of the Companies ACt 2013 provides that:
before issuance of the prospectus, a copy of it shall be delivered to the
Registrar of Companies of that State where the company is located, for
registration, signed by director or proposed director or by his duly authorized
attorney.
In
Pramath Nath Sanyal v. Kali Kumar Dutt[1],
the company made an advertisement by means of a newspaper stating, “some
share s are still available for sale according to the terms of the prospectus
of the company which can be obtained on
application”.
The
Court held that the advertisement constituted a prospectus because it invited the
public to purchase shares. The directors were therefore penalized for not
complying with the requirements of filing a copy thereof with the Registrar of
Companies under Section 27(9) of the Companies Act, 2013. The prospectus shall
be issued within 90 days of its delivery to the Registrar for registration,
otherwise it becomes invalid. This is stated in Section 26(8) of Companies act,
2013. Section 25 of the Companies act, 2013 states that: 'every document
containing offer of securities to the public shall be deemed to be a prospectus'.
CONTENTS OF
PROSPECTUS:
The
contents of the prospectus have been specified in Section 26 of The Companies
Act, 2013 as under:
1.
names and addresses of the registered office of the
Company, Company Secretary, chief
Financial Officer, auditors, legal advisors, bankers, trustees, if any,
underwriters and such other persons as
may be prescribed;
2.
date of the opening and closing of the issue and
declaration about the issue of allotment letters and refunds within the
prescribed time;
3.
procedure and time schedule for allotment and issue of
securities;
4.
capital structure of the company in the prescribed
manner;
5.
minimum subscription amount;
6.
main objects of public offer;
7.
main objects and present business of the company and
its location;
8.
how the amount to be payed should be stated in the
prospectus.
WHEN
PROSPECTUS IS NOT REQUIRED TO BE ISSUED:
The
prospectus is not required to be issued:
1. if someone
is a bonafide invitee to purchase shares or provide debentures to the Company;
2. if the
shares or debentures are not offered to the public;
3. if shares
or debentures are offered to existing shareholders or debenture holders;
4. if a
prospectus is published as a newspaper advertisement, it is not required to
specify the contents of memorandum, names of signatories to the memorandum or
the number of shares subscribed by them;[2]
LIABILITY
FOR FRAUDULENT MIS-STATEMENTS IN PROSPECTUS:
There
are civil as well as Criminal liabilities for the fraudulent misstatements in
prospectus.
Section 34: Criminal liability for mis-statements in prospectus:
Where
a prospectus, issued, circulated or distributed under this Chapter, includes
any statement which is untrue or misleading in form or context in which it is
included or where any inclusion or omission of any matter is likely to mislead,
every person who authorises the issue of such prospectus shall be liable under
section 447.
Provided
that nothing in this section shall apply to a person if he proves that such
statement or omission was immaterial or that he had reasonable ground to
believe, and did up to the time of issue of the prospectus believe, that the
statement was true or the inclusion or omission was necessary.
Section 35: Civil liability for mis-statements in prospectus:
(1) Where a person
has subscribed for securities of a company acting on any statement included, or
the inclusion or omission of any matter, in the prospectus which is misleading
and has sustained any loss or damage as a consequence thereof, the company and
every person who--
(a) is
a director of the company at the time of the issue of the prospectus;
(b) has authorised
himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director, either immediately or after an
interval of time;
(c) is
a promoter of the company;
(d) has
authorised the issue of the prospectus; and
(e) is
an expert referred to in sub-section (5) of section 26,
shall,
without prejudice to any punishment to which any person may be liable under
section 36, be liable to pay compensation to every person who has sustained
such loss or damage. (2) No person shall be liable under sub-section (1), if he
proves--
(a)
that, having consented to become a director of the company,
he withdrew his consent before the issue of the prospectus, and that it was
issued without his authority or consent; or
(b)
that the prospectus was issued without his knowledge
or consent, and that on becoming aware of its issue, he forthwith gave a reasonable
public notice that it was issued without his knowledge or consent.
(3) Notwithstanding anything contained in this
section, where it is proved that a prospectus has been issued with intent to
defraud the applicants for the securities of a company or any other person or
for any fraudulent purpose, every person referred to in sub-section (1) shall
be personally responsible, without any limitation of liability, for all or any
of the losses or damages that may have been incurred by any person who subscribed
to the securities on the basis of such prospectus.
Ø The aggrieved
party has to prove that company’s members knew the statements of the prospectus
to be false or had done concealment of some material fact. This was held in Derry
v. Peek[3].
Ø Secondly,
in order to succeed for an action for fraud, the investor must have taken the
securities directly from the Company and not from his any intermediary agency/
open market.
POWER TO
ISSUE SECURITIES BY PUBLIC AND
PRIVATE
COMPANIES:
This
is provided in section 23 of the Companies Act, 2013 as under:
Section 23: Public offer and
private placement:
(1) A public company may issue securities--
(a) to public
through prospectus (herein referred to as "public offer") by
complying with the provisions of this Part; or
(b) through a
rights issue or a bonus issue in accordance with the provisions of this Act and
in case of a listed company or a company which intends to get its securities
listed, also with the provisions of the Securities and Exchange Board of India
Act, 1992 (15 of 1992) and the rules and regulations made thereunder.
(2) A private company may issue securities--
(a) by way of
rights issue or bonus issue in accordance with the provisions of this Act; or
(b) through
private placement by complying with the provisions of Part II of this Chapter.
Example--For
the purposes of this Chapter, "public offer" includes initial public
offer or further public offer of securities to the public by a company, or an
offer for sale of securities to the public by an existing shareholder, through
issue of a prospectus.
Public
offer of securities to the public can be made by the company or for sale of
securities by the existing shareholders, through issue of a prospectus.
The
term “private placement” in Section 23 is defined in clause (ii) of Explanation
II to section 42 of the Companies Act, 2013 as under:
“private
placement” means any offer of securities or invitation to subscribe securities
to a select group of persons by a company (other than by way of public offer)
through issue of a private placement offer letter and which satisfies the
conditions specified in this section.
WHO CAN
BECOME MEMBER OF A COMPANY?
Section
2(55) of the Companies At defines this. It states:
“Every
person who has subscribed in the memorandum and has been registered in the
register of members of company or
who
has agreed in writing to become member of the company and whose name is entered
in the Register of members; or
every
person who is holding shares of the company and whose name is entered as beneficial
owner in the records of the depository, shall be deemed t o be a member of the
Company.
SHARE: The term
share is defined in Section 2(84) of the Companies Act, 2013 as under.
Section
2(84): "share" means a share in
the share capital of a company and includes stock.
ALLOTMENT
OF SHARES:
The
prospectus is issued to invite the public to invest in their company by
purchasing securities. When any person
subscribes or gives application for purchase of securities, it is an offer to
the company. The company can either accept or reject that offer. The allotment
of shares by the company is acceptance to the offer and the person to whom the
shares are allotted is called allottee. Section 39 of the Companies Act
provides provisions for allotment of securities.
Section 39: Allotment of securities by company:
(1)
No allotment of any securities of a company offered to
the public for subscription shall be made unless the amount stated in the
prospectus as the minimum amount has been subscribed and the sums payable on
application for the amount so stated have been paid to and received by the
company by cheque or other instrument.
(2)
The amount payable on application on every security
shall not be less than five percent of the nominal amount of the security or
such other percentage or amount, as may be specified by the Securities and
Exchange Board by making regulation in this behalf.
(3)
If the stated minimum amount has not been subscribed
and the sum payable of application is not received within a period of thirty
days from the date of issue of the prospectus, or such other period as may be
specified by the Securities and Exchange Board, the amount received under
sub-section (1) shall be returned within such time and manner as may be
prescribed.
(4)
Whenever a company having a share capital makes any
allotment of securities, it shall file with the Registrar a return of allotment
in such manner as may be prescribed.
(5)
In case of any default under sub-section (3) or
sub-section (4), the company and its officer who is in default shall be liable
to a penalty, for each default, of one thousand rupees for each day during
which such default continues or one lakh rupees, whichever is less.
GENERAL
PRINCIPLES FOR ALLOTMENT[4]
OF
SHARES IN A
COMPANY:
This
section provides the general principles for allotment of shares in a company:
1. The
allotment should be made by proper authority, i.e. the Board of Directors of the
company or a committee authorized to allot shares on behalf of the board.
Allotment made without proper authority shall be invalid.
2. The
allotment of shares must be made within a reasonable time as stipulated in
3. Section 6
of the Indian Contract Act, 1872;
4. The
allotment must be absolute and unconditional. This is stipulated in sEction 7
of the Indian Contract Act, 1872;
5. The
allotment must be duly communicated. Posting of allotment letter shall be taken
as a valid communication even if the letter is lost in transit. This is according
to Section 4 of the Indian Contract Act, 1872.
STATUTORY
RESTRICTIONS ON ALLOTMENT[5]:
The
provisions for statutory restrictions are contained in section 39 of the
Companies act which provides as under:
1.
Any person who wants to purchase securities of a
company is required to fill an application form. The amount of application form
shall not be less than 5% of the value of one share.
2.
The minimum subscription amount shall be 90% of the
entire issuance of shares.
3.
There is a minimum subscription amount stated in the
prospectus. The company cannot allot its shares to any applicant unless the
minimum subscription amount is raised by it.
4.
Section 39(3): If f the minimum subscription amount is
not raised within 30 days of the issuance of prospectus, the Company shall
refund the whole amount of application money and the amount subscribed by its prospective shareholders.
5.
Section 39(4): Whenever a company having a
sharecapital makes any allotment, it shall file with the Registrar a return of
allotment.
6.
Section 39(5): In case of any default under section 39(3)
or (4), the company and its officers who is in default shall be liable for
a penalty of Rs. 1000 for each day
during which the default continues or Rs, 1 lakh, whichever is less.
7.
If the minimum subscription amount is raised within
the thirty days of issue of prospectus, then opening of the subscription list
will take place in following manner:
(A) No
allotment shall be made until the beginning of the fifth day of issue of
prospectus;
(B) The
companies which have issued statement in lieu of prospectus instead of
prospectus for allotment of shares, shall not make any allotment until the
expiry of three days from the date on
which the statement in lieu of prospectus is filed with the Registrar of
Companies.
8.
The listing of shares in the stock exchange is made
compulsory. the advantage of listing is that they are freely marketable and
there is considerable increase in their face-value.
CONCLUSION:
The
provision of private placement, global depository receipt[6]
(issue of depository receipts in any foreign country by passing it through
special resolution of the company) and issue of bonus shares has been
introduced by Companies Act, 2013. These amendments have been made to make the
Act in consonance with modern requirements. In the Companies Act 2013, the
concept of issue of prospectus and allotment of shares is made such that it
provides required capital to the company for carrying out its venture and
concurrently, it protects the rights of investors. These amended provisions on
the prospectus and the allotment of shares in the Companies Act 2013 have not
been revised by the Companies Amendment Act 2020, thus these provisions would
continue in operation.
Article Information
CONCEPT OF PROSPECTUS AND ALLOTMENT OF SHARES IN A COMPANY: LEGAL DISCOURSE WITH REFERENCE OT THE COMPANIES ACT 2013
Authors: VAIBHAV KARTIKEYA AGRAWAL
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/10/26
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
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